OVERVIEW OF INDIAN TAX LAWSCOMPANY LAW AND MODES OF FINANCE The law relating to companies is governed by the companies Act, 1956 (‘Companies Act’). The Registrar of companies and the Company Law Board administer the provisions of the Act. Companies incorporated under the Act can be ‘Public’ or ‘Private’ companies, with or without limited liability. The limited liability structure can be achieved through limitation by shares, or by guarantee. Even an unlimited company can incorporated under the Indian Companies Act. The two basic methods of funding projects are either by means of equity or debt. Outlined below are some of the more common instruments and a brief description of them. EQUITY SHARE CAPITAL (COMMON STOCK) Ordinary shares are the basic element of ownership of a company. They carry voting rights, and therefore, are the ultimate means of exercising control of a company, as well as rights to dividends and return of capital upon winding up. The normal value of equity shares is Rs 10 per share. Shares may be issued at par, at premium or at a discount by existing companies. A recently introduced provision, now permits companies to issue non voting equity hares, upto a maximum of 25% of total equity capital. PREFERENCE SHARE CAPITAL (PREFERRED STOCK) Preference shares can be issued by a company these must be redeemed within 10 years. DEBENTURES AND PUBLIC DEPOSITS Indian companies can raise funds through the issue of debentures (which have a wider impact and include debenture stock), bonds and any other securities of a company. However, the issue of debentures carrying voting rights is forbidden. Another source of raising finance is through the acceptance of deposits the companies Act provides the manner, and sources from which deposits can be invited and accepted. LOANS An integrated network of financial institutions caters to the long and medium term financing needs of industrial projects, by way of project loans, underwriting, deferred payment, guarantees, leasing, venture capital, and a variety of other financial products. Moreover, debt funding from overseas can be obtained through External Commercial Borrowings, after prior permission from the Ministry of Finance/Reserve Bank of India. OVERVIEW OF INDIAN TAX LAW The law relating to income tax has been enacted in the Income Tax Act of 1961 (‘Act’), amendments to the Act are made through annual finance Acts of Special Amendment Acts. DIRECT TAXES GENERAL Indian companies are taxable in India on their worldwide income, irrespective of its source and origin. Foreign companies are taxed only on income which arises from operations carried out in India or, in certain cases, on income which is deemed to have arisen in India. The later includes royalty, fees for technical services, interest, gains from sale of capital assets situated in India (including gains from sale of shares in an Indian company) and dividends from Indian companies. ASCERTAINMENT OF TAXABLE INCOME In arriving at taxable income, outlays incurred wholly and exclusively for business purposes are deductible. Certain expenses are specifically disallowed or their quantum of deduction is restricted. MINIMUM ALTERNATE TAX (MAT) Minimum Alternate Tax provides that where the total taxable income of a company is less than 30 percent of its book profits, computed in accordance with the Companies Act, 1956, the company would be required to pay income tax on 10.5 percent of its book profits. Export profits are excluded from book profits for the purpose of MAT and are also eligible for tax concession under section 80 (HHC) of Income Tax Act. CARRY FORWARD AND SET OFF OF BUSINESS LOSSES Business losses including the unabsorbed depreciation element can be carried forward for eight years and can be set off only against profits and gains of business and profession, provided the business in which the loss actually arose in continued in such tax year. Carry back of business losses however, is not permissible. CORPORATE TAX RATES Indian Company : 35 percent Foreign Company : 48 percent CAPITAL GAINS Gains on sale of capital assets held for more than 3 years (1 year for shares and listed securities) are treated as long term capital gains and accorded concessional tax treatment. Long term capital gains are taxed at a flat rate of 20 percent (plus surcharge of 7.5 percent) for Indian companies and 10 percent for foreign companies. WITHHOLDING TAX Withholding of tax is required from all payments chargeable to tax made to non residents at rates specified under the domestic law treaty, whichever is lower. The domestic tax withholding rates are illustrated alongside. Withholding tax is also applicable to specified payments to residents. INCOME TAX INCENTIVES FOR MINING INDUSTRY
WITHHOLDING TAX RATES
TAX TREATIES Agreements for avoidance of Double Taxation signed by India with various countries are usually based on the Untied Nations Model. They provide a favourable alternative mode for determining taxable business profits, as compared to methods under the domestic tax law. The treaties also provide specifically the mode of taxability of incomes in the nature of dividends, interest, royalty and fees for technical services. PRINCIPAL INDIRECT TAXES EXCISE DUTIES Excise duties are levied in terms of the Central Excise and Salt Act, 1944 and the Excise Tariff Act, 1985. Minerals in their finished from are excisable items. However, they have been exempt from the whole of the duty of Excise leviable thereon. All manufacturers of excisable goods are required to register under the Central Excise Rules, 1944. The registration is valid for as long as production activity continues and no renewals are necessary. CUSTOM DUTIES The Export-Import Policy (‘EXIM’) 1997-2000 regulates the import and export of goods. Goods which are mentioned in the Negative List of Imports appended to the EXIM Policy, are either prohibited from being imported or restricted through licensing, canalised. Custom duties are levied as per the terms of the Custom Act, 1962 and Custom Tariff Act, 1975. Custom duties are leviable on all goods which are freely importable. Mining has been classified as a manufacturing activity under the Export Promotion Capital Goods (EPCG) Scheme. Capital goods imported for mining would qualify for concessional rates of customs duty subject to certain export obligations. SALES TAX Sales tax is a single point tax i.e. tax levied on sale of a commodity which is manufactured of imported, and sold for the first time. Subsequent sale of the product without any process is exempt from Sales tax. Sales tax is levied either under the Central or the State Sales tax Acts. There is no Sales tax on services and exports. OTHER TAXES
LEVIES UNDER THE MINES AND MINERALS (REGULATION AND DEVELOPMENT) ACT Under the MMRD Act, the following rents, fees and royalties are to be paid.
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